How Technology Has Been A Game Changer For The Banking And Financial Services Sectors
How Technology is a Game Changer for the BFSI Sector
It would be an understatement to say that technology has revolutionized the banking and financial sectors. Right from the day to day retail banking where technology in the form of ATMs (Automated Teller Machines), to the corporate banking where technology is ubiquitous, to the derivatives market where algorithmic trading happens round the clock, technology has transformed the landscape of banking and financial services.
Indeed, the pervasive use of technology in the BFSI (Banking and Financial Services and Insurance) sector has meant that the losers are the ones who do not use technology wherein unless institutions in this sector adapt to technology and adopt the latest tools and software, they are bound to perish in the uber-competitive market landscape. In other words, technology has become a source of sustainable competitive for firms in the BFSI sector.
Economies of Scale and Synergies through Integration
Moreover, technology allows the firms to scale up easily and at a marginal cost which means that banks and financial services firms can add as many clients as possible and serve as many customers as possible with the incremental marginal cost since technological platforms once rolled out do not incur heavy costs for each new entrant to the portals.
To explain, say if a bank implements a retail banking solution and signs up hundred thousand customers. The initial costs are of course high. But, once the solution is in place, all it takes for the bank to add new customers and make them use the portal, the cost of adding each new customer falls drastically thereby ensuring that the bank can add potentially infinite number of customers with the associated costs being marginal and only need to be towards maintenance and upgrades rather than fixed costs of setting up the infrastructure and the backbone that are already in place.
Contrast with traditional banking where each new customer added needs extra staff or extra effort to service them. Thus, it is no surprise that banks and financial services firms have lowered the account maintenance costs once they have implemented technology-enabled platforms and portals.
In addition, let us consider what happens when different components of the banking and financial services value chain are automated and integrated with the help of technology. Historically, money withdrawal and investing in fixed deposits and other savings instruments were separate activities in addition to retail, corporate, and investment banking being altogether different departments.
Now consider if customers can do all the activities associated with these functions in one single portal which means that both the bank and the customers are saving time and costs due to integration.
In this manner, what is known as synergies accrue wherein synergy as defined as “the whole being greater than the sum of the parts” actualizes efficiencies and benefits to all stakeholders? To explain, when disparate and discrete functions are integrated, the “hidden benefits” in terms of savings of time and effort means that these gains are synergistic in nature.
Thus, technology allows the BFSI firms to both reap the efficiencies from the economies of scale and the gains from synergistic banking.
How Technology Helps Exotic Financial Products to be Offered to the Clients
Now let us turn to the exotic side of banking and financial services which is the aspect of investment banking wherein the use of technology is so pervasive that Investment Banks like Goldman Sachs and JP Morgan hire so-called Quants or the Mathematical Geniuses straight out of college so that they can bring their technical and scientific expertise to devise complex investment products such as Derivatives.
Indeed, the combination of advanced technology enabled trading platforms, and the wizardry of the Quants means that highly sophisticated and specialized derivative and swaps, as well as debt and equity products, can be offered to their clients.
Apart from this, the use of advanced technology also allows stock and bond traders as well as traders in commodities to transact 24/7 and in real time which means that the motto of the famous BFSI firm, Citigroup, “The City Never Sleeps” is literally and figuratively true. Further, the use of technology also allows the BFSI firms to offer better customer service to their clients as all the information is centralized meaning that customers need not call multiple locations for their banking needs and instead, call a SPOC or Single Point of Contact who is now known as Relationship Manager.
Indeed, the rise of the Relationship Manager for High Net worth Clients has transformed the banking landscape and taken customer service to an entirely new level.
Bankers Must use Technology Responsibly
Having said that, while all the above seems to be well and good for everyone, there are concerns by many experts, activists, and regulators that such Godlike powers that technology offers the bankers can be misused and abused either out of ignorance or willful blindness.
Indeed, the fact that the Global Financial Crisis of 2008 was largely blamed on speculation using advanced technologies is one reason why some are worried.
Thus, it is clear that there must be a responsible use of technology and as long as one takes the position that Technology is Value Neutral and the humans using it have to do so with caution, it is clear that such technologies can be a forced for good.
To conclude, technology has been a game changer for the banking and financial services sectors, and as long as we do not have malicious intents in using such awesome power, it would continue to drive human progress.